IPCC urges central banks to address ‘systemic underpricing’ of climate change

March 23, 2023|Written by

Financial regulators should address the underpricing of climate-related risks and mismatches between capital and investment in order to address global climate change, according to the latest UN report summarising the state of knowledge on climate change.

The final part of the Intergovernmental Panel on Climate Change’s (IPCC) sixth assessment report notes that “both adaptation and mitigation financing would need to increase many-fold” to meet stated climate goals but that “financial flows fall short of the levels needed”.

Overall, the report makes clear that time is running out to keep warming below 1.5ºC and that “deep, rapid and sustained” emissions cuts are required within the decade. It also highlights that people around the world are already experiencing the dangerous impacts of extreme weather events, along with food and water scarcity.

According to the IPCC, models indicate that the financing needed to limit warming to 2°C or 1.5°C are a factor of three to six-times greater than current levels. It notes that “there is sufficient global capital to close the global investment gaps but there are barriers to redirect capital to climate action”.

One of the largest barriers to both mitigation and adaptation efforts appears to be a financial mismatch between developed and developing nations. In a statement, one of the report authors explained that “the greatest gains in wellbeing could come from prioritising climate risk reduction for low-income and marginalised communities”. The report states that “funding for vulnerable regions, especially in sub-Saharan Africa, would be cost-effective and have high social returns in terms of access to basic energy.”

As a result, the report’s authors encourage action by fiscal authorities, financial regulators, and private sector financial actors to align financing availability with needs.

Some central banks and financial regulators are taking action or considering actions to address the need for climate-related financing. The China Banking and Insurance Regulatory Commission, for example, issued guidance requiring banks and insurance companies to “support key industries and fields in energy conservation, pollution reduction, carbon reduction, and greening”. The Bank of Japan and Bank of England have both engaged in green asset purchases. Others, such as the European Central Bank, have been considering such actions.

This page was last updated March 31, 2023

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